Should you lease a car or buy one with a loan? We do the math

If you're looking for a new ride, the decision between car leasing and purchasing can be a tough one. It all comes down to finding the right balance between short-term affordability and long-term financial considerations. 

How does Leasing work?

It allows you to take home a new car without the hassle of owning it, or without even having to make a downpayment. You will have to pay  monthly instalments for as long as you keep the car. Instalments include the cost of the vehicle, insurance, maintenance, and other recurring costs. 

At the end of the leasing period, the lessor may allow the user to purchase the vehicle at the prevailing market price. This condition may vary across the market. There are no additional costs for insurance and taxes apart from the lease amount charged by the lessor.

When you lease a vehicle, the maintenance of the vehicle is done by the company that owns the vehicle. You don’t have to spend anything extra on regular vehicle maintenance and repairs. 

Pay for usage model

Car leasing follows the pay for usage model where you pay only for the period during which you use the car. Here, the period of usage is pre-determined and agreed upon by the lessor as well as the lessee. Once the usage period is over, you can surrender the vehicle to the owner and stop paying your instalments. The instalment amount you pay for leasing a car includes insurance charges. You can get comprehensive insurance coverage against all kinds of repairs, accidents, thefts, etc. The minimum lock-in period is 2 years and the maximum is 5 years.

Monthly rental usually includes the following:

It varies from company to company, but the most comprehensive corporate plans cover the following:

Repair & Maintenance for full tenure

Pick Up & Drop Facility

Replacement Car facility

Road side assistance

Insurance for full tenure

Roadtax

Two kinds of leasing models:

There are two kinds of leasing models—finance leases and operating leases. Corporates usually follow the operating lease model where you either return the car to the lessor or purchase it at the prevailing market value at the end of the lease tenure. The finance lease model transfers the ownership of the car to your name at the end of the tenure.

Biggest USP? 

Tax benefit: The lease amount you pay for a vehicle is eligible for tax relief. Leasing a vehicle could help you save as much as 30% on your taxes. This is applicable for self-employed as well as salaried professionals.

If the lease rental of the car is part of your salary package, it means the lease amount would be reduced from your salary before taxes are paid, thereby reducing your taxable income and giving you a considerable tax advantage as compared to someone who hasn’t opted for this benefit. For example, your salary package is Rs 25,00,000 per annum. Of this, Rs 4,80,000 is your car lease amount, and another Rs 39600 is allocated towards car maintenance, insurance, fuel and driver allowance. So in total Rs 5,19,600 will be deducted from your taxable income, and you will be liable to pay tax on Rs 20,59,600 only.

Does car loan have tax benefits
From a purely mathematical standpoint, a car loan does not offer tax deductions, unlike a home loan. However, for salaried employees, leasing a car could save 20-40% of the car's value in taxes. 

"For example, if your CTC is Rs 30 lakh per annum, and your car lease rental is Rs 5 lakh, assuming no other deductions, your gross salary for taxation purposes is Rs 25 lakh. After factoring in the standard deduction of Rs 50,000, your taxable income is Rs 24.50 lakh. Since you are in the 30% tax slab, your tax liability will be Rs 7.35 lakh. Instead, if you had bought the same car, you would not have received any tax deductions. Your gross salary for taxation would be Rs 30 lakh. After the standard deduction, your taxable income would be Rs 29.50 lakh, and your total tax liability is Rs 8.85 lakh. So, by leasing, you saved Rs 1.5 lakh in income tax," explained Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth. 

Flexibility

Typically, a car lease agreement is between 3-5 years, depending on the employer's policies. During this time, instead of the car loan EMI, the employee pays a pre-agreed lease rent. When the lease ends, the employee can buy the car by paying the remaining amount or even opt for a different car. So, there is additional flexibility that you do not get while buying a car.

You have the flexibility to upgrade your model and once the lease scheme is over, you can return the car to the company and get another of your choice.

Now let's figure out your monthly outgo, if you lease a car and if you buy a car with a loan

How much will it cost you to lease a car which costs Rs 13 lakh on road 
 

Note: Table provided by Bankbazaar.

The lease rental value shown in the table is an approximate average value calculated from websites of various car lease rental companies that allows total car run up to 15000 kms/per year. It's assumed that the car owner falls in the highest tax bracket and lowers his/her taxable income by deducting the lease amount from it.

How much will it cost you per month if you buy a car through a loan?

Note: First year free service, Maintenance cost for 4 year+misc cost per year= Rs 15000; Battery Cost= Rs 5000; Costs such as insurance, repair, servicing charges, etc. shown in the table are approximate value and may vary depending on car variant, brand, city, car running, driving condition and several other factors.

Depreciation on car assumed at 20% pa. Calculation shown in the table is only for illustrative purpose.It's assumed that car doesn't meet any type of damage or accident during the ownership period.

When car leasing doesn't make sense

- In car leasing, there is a restriction on how many kilometers you can drive the car during the entire lease period. On exceeding the threshold, they may charge extra on per KM basis or levy a penalty as per their t&c

If you like road trips etc, then leasing is not a good option because there is a cap on the number of kilometres you can drive. For example, if your monthly cap is 666 km, it comes to roughly 22 kms a day. And if you exceed this quota, you have to pay Rs 7.2/km as excess charges.

Moreover, to install any accessories you first have to inform the company and get an email approval. Also, in case there is damage to the car due to installation of accessories then you may have to bear that cost.

Car leasing is also costlier if you leave the company in between or want to terminate the lease before lease tenure completion as many companies keep penalty charges in case of mid termination of car leasing.
 

"Leasing offers lower initial payments and monthly instalments, making it a viable option for those who can't afford to pay a lot upfront. This means you can access higher-end vehicles that would normally be out of reach. However, it's important to keep in mind that mileage caps and additional charges can result in higher costs in the long run, and you won't own the car," said Adhil Shetty, CEO of Bankbazaar.

On the other hand, purchasing a car requires a higher initial down payment and monthly instalments. But with ownership comes the freedom to customise the car to your liking and lifestyle. However, you'll also be responsible for bearing all maintenance and repair costs once the warranty expires, and you risk depreciation affecting resale value.

"If you value long-term stability and ownership, purchasing a car could be the better financially feasible option," added Shetty.